A new family business model for owners and their familiesArticle added by Don Wilkinson on June 18, 2009
Don Wilkinson

Don Wilkinson

Newport Beach, CA

Joined: August 21, 2010

My Company

DFW & Associates

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Most advisors would agree that a successful family business owner (FBO) is a prime candidate for a family office. Unlike other affluent people who come by great wealth by inheritance, professional careers or situational events (i.e., marrying-in), the FBO is routinely involved in building a business(s) throughout his or her career, without much time to stop and focus on family wealth-building and legacy.

The main goal of the family office is to grow and protect assets for the future family office. It may not be a household word for the successful family business owner -- until it finally dawns on him or her before the horses are at the door -- something needs to be done to preserve the business and begin to pass to the next generation.

Making the most, but knowing the least

Knowing the fact that 35 percent of Fortune 500 businesses are family-owned, thereby creating the necessary wealth to establish a family office ($100-250 million minimum in investible assets for a single family office and $25 million in assets for a multi-family office), the needs of the family business owner who must begin succession planning often neglects this important life changing phase until it's too late. Too late means the death and/or serious illness of the principal, short-sale, unplanned closing of the business, or an inheritance with a probable and messy conclusion among surviving family members.

If a first generation business has been a success, the original business owner(s) has probably spent a lifetime pouring most of his or her time, energy and money into that effort. The owner sees the company as an extension of his person, and it may be hard to even imagine life without it. In some cases, the entire family may have depended on the business, discussed it endlessly and even used it as an educational opportunity and proving ground for their children.

Phase No. 1: The family office

The stereotypical business owner is determined to continue the business beyond his or her lifespan -- an effort to build a legacy for generations to come. This person is not one who relishes selling the business on a quick cash buyout. And, for this business owner, the family office is the practical next step to take his or her business wealth to the next level.

Unlike other people of substantial wealth, the family business owner usually has family members who can contribute to, at most, chaos within the business and, at least, uninspired planning with conventional wills and trusts with boilerplate provisions. Not a good way to customize tax reduction methods for the next generations. Thus, time and time again, the wealth of successful FBOs is reduced to nothing more than distribution -- an inheritance. This is a fleeting, one-time occurrence that can disrupt or even destroy the business, create divisions in the family and scatter the assets to the four winds.

If a business owner harbors intentions of preserving the business for future generations -- with the ultimate goal of preserving long-term wealth to keep it in the family-- it would be far better to follow this family business model. It should be emphasized that, like public companies, the business owner has the usual weight of responsibility of running a business (inventory control, pricing, labor issues, marketing, etc.) to achieve profitability in good times and bad. However, what is different for the FBO is the injection (or rejection) of family members into the business climate, which may be positive or negative.

While public companies can narrow their focus in expanding production, cutting costs, and so on, the private business owner must consider similar decisions, but with additional decisions usually made in the best interest of the family. Failure to separate family issues from business issues can threaten family harmony. The installation of a family office is a major step toward this important separation.

It's my recommendation that a non-family person be chosen to manage the family office in order to keep day-to-day and major decisions an impartial as possible. This CEO reports directly to the family business owners.

Planning inside the family office: Exit and retirement planning

Eventually, the business owner gets the message that his or her succession plan should begin, as mortality is finally realized. If the business is to be continued for the benefit of future generations, strategic planning must usually begin a minimum of two years out. Incidentally, the vast majority of business owners have never developed a strategic business plan using an outside firm. Since this phase of the business lifecycle is the second most important phase after start-up, it's in the interest of the business owner to finally begin this important step to ensure a comfortable future retirement.

Enter the wealth optimization advisor

It is absolutely essential that an outside firm be brought in to facilitate the building of the family office concept for the business owner. This individual's responsibility is to move the family towards establishing a family office. He or she will be an overseer of the project. The firm will provide information such as budgets and start-up costs, and have access to the resources necessary to bring the family office to a reality -- usually start-to-finish within one year.

The hiring of an independent strategic business firm is essential. Their main goal is to help family members work more harmoniously together for better results and profitability. When this is finally achieved, this is when the business owner can finally let go and prepare to pass to the next generation. Most business owners don't want to come back, because they want to focus on a comfortable and fun retirement.

If everyone reads from the same page, the implementation of the family office can go smoothly and solve challenging intergeneration transfers, estate planning, succession planning and shareholder liquidity requirements. Also, during this planning process, one should clarify what family members want and need (expectations and responsibilities) from the business and each other, without the current generation in charge.

A case study

Take the fictitious Anderson family, who has manufactured fire protection equipment for 30 years. The patriarch of the family saw an uncomfortable situation coming as he reached retirement age. He wanted to hand off the business to one of his three sons. All three had been groomed to take over, as they had all been involved in running most aspects of the business since high school. Now the father had to make the choice of which son would run the company when he gave up the reins.

Faced with a most difficult decision, this business owner decided to bring in an unbiased advisor who would coordinate the family's succession plan. The advisor soon told him that succession planning is more than simply selecting the next CEO. It is more about developing the talent, focus and resources necessary for the business to continue to be successful under new management.

As the family business owner became more educated about the family office concept he became eager to pursue the development of his company succession plan by planning his departure within a two-year timeframe. A council was established to provide clear communication of transpiring events between family members and long time employees. Non-employee family members were also included in the loop of information sharing. A Web site was even set up to inform all parties of the latest developments.

The principal asked each of his three sons to develop a long-term strategic plan of how he would run the company if selected as CEO. The advisor convinced the business owner that succession should be based on managerial ability rather than birthright.

The family office chaired by the advisor outsourced or hired in-house personnel such as CPAs, attorneys and wealth managers, to fulfill objectives of the business strategic planning process developed earlier.

This was necessary to improve profitability and reduce taxes during this transition phase. During phase one of setting up a family office, a business owner such as Anderson above has access to the following services:
  • Integrated tax and estate planning
  • Total asset management for all family members
  • Trusteeship
  • Risk management
  • Lifestyle services (i.e., turnkey vacations, family medical concierge)
  • Record-keeping and reporting
  • Family continuity
  • Family philanthropy
At the time that this family office was up and running, the fire protection business was going well and all parties were privy to the information of the transfer of the business to the next generation. The successor was named with harmony, as everyone agreed that Anderson's middle son had the best qualifications for the next generation of management for the company.

The company was now prepared for the final phase of the succession plan. Take a look at the Ultimate Wealth Management Process for family business owners below:



Phase No 2: Family foundation

The final phase of this business model is the establishment of a family foundation. Such a foundation is the final essence of the principal business owner's quest to ensure continuity of his legacy for family members in generations to come. Setting up a family foundation for a business owner and his or her family is an ideal way to give funds to charitable causes, while making those funds exempt from federal income tax.

Not only that, but if a family foundation is established, family members can work toward common goals or instill the value of charitable giving in future generations of the family. The giving vehicle of a family foundation, which provides full family control, allows for extensive benefits to families who give more than $25,000 a year to charity.

The family foundation, having the same character tics as a private foundation, is a foundation whose board consists of family members of the person(s) who originally funded the foundation. The board of a foundation has ultimate control over its actions. It can choose an asset manager, grant recipients, hire and fire staff, etc. Many families set up a foundation specifically to involve their family in their grant making. As mentioned, foundation involvement can be an excellent way to educate younger family members about asset management, taxes, responsibility, family values and most importantly, giving to charity.

Since a family foundation is a charitable organization, it is exempt from federal income tax, although it must pay a 1 percent to 2 percent excise tax on its net investment income. The gifts made to establish a new foundation or grow an existing foundation can offer the family certain tax advantages: income, gift and estate tax deductions are available under the law.

The benefits of establishing a family foundation with a family office:
  • Immediate income tax deductions for amounts donated to foundation

  • Reduce income taxes by up to 30 percent per year

  • Exempt from estate and gift tax

  • Long-term build up of foundation assets, free of income tax

  • Complete legal control of foundation during life of founder

  • The ability to make the world a better place through a sustained long-term program of well-planned and executed charitable giving

  • An unique opportunity to share value and vision with children and grandchildren, while building a permanent legacy

  • After the founder passes, foundation may stay under family control
Succession success is ensured with this two phase approach

With the implementation of the family office and the family foundation for the affluent family business owner, successful transition of his business during his lifetime and beyond is insured, while his legacy is made more permanent.

*For further information, or to contact this author for more information on this two-phase added concept tailored to successful family business owners, please leave a comment and your e-mail address in the forum below.
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